The Lippis report Issue 01: It’s the Enterprise, Stupid!

It´s clear and evident that the Telecom Act of 1996 was a huge failure on the part of Congress and the Clinton administration, no matter how you measure it. Pre-1996 there were seven regional bell operating companies (RBOCs), now there are five. There was supposed to be more competition, not less. US telecom spending in 2002 is nearing 1995´s $40B spend, down from a high of $136B in 2000.

The communications industry has come full circle in five years back to monopolies, which seem destined to be oligopolies. As consolidation continues its path, the monopolistic local service providers will seek spending efficiencies and increase service pricing by eliminating competition. The fewer service providers there are, the greater their buying power over equipment suppliers, and the fewer choices there are for enterprise managers.

The implications of this communications industry restructuring are vast. Let´s face it, RBOCs have never been innovative. They understand voice well, but fall very short when it comes to high-speed data and Internet services. They gave us ISDN and SMDS – need I say more. They were forced by temporary competition to offer DSL and Internet access services. And now, thanks to their $19M lobbying spend, the RBOCS may finally push the CLECs out of the DSL market for good. They will not offer Ethernet metro services in any significant way unless, once again, they are forced to do so by competition. Metro Ethernet players like Cogent, Yipes, Telseon, Giant Loop, etc., are feeling a capital crunch limiting their ability to compete with the RBOCs. Point of fact,
Yipes, the metro ethernet market leader, just filed for voluntary reorganization under chapter 11 Bankruptcy due to this capital crunch.

The bottom line: the suite of communication services from the RBOCs and IXCs will not change much over the next several years. In other words, innovation and competition in the service provider market is currently dead. We already know what is going to happen on the network equipment side of the equation. Lucent will never come back, Nortel may recover and Cisco is a given survivor with the best balance sheet in the industry. The optical space, with a ton of start-ups, will collapse upon itself. So, too, will
many other categories riddled with start-ups, especially those trying to build a core router. The equipment supplier market has already consolidated to oligopoly status, with 80% of revenues likely to flow to the top tier players. With the number of significant service providers down to about 10, look for many more wash out rounds in the Valley and elsewhere. We may also see a wave of mergers and acquisitions at the high end of the equipment market as storage, computing, and networking companies compete for a shrinking revenue pie. Could Cisco be acquired by IBM or merge with Sun or Oracle?

Don´t hold your breath for Congress or the Bush administration to help, either. Telecommunications service providers are among the largest contributors to political campaigns. The RBOCs have the lock on lateral builds and access into businesses and residences. The one white knight could be reliable high-speed wireless technology that delivers Ethernet speeds to the last mile into businesses. But even if we had this technology, it would take years to build out. For now, we are back to an industry structure that is less competitive and innovative than 1995. We may be in the dark ages of networking, a period that´s dominated by a few lethargic, risk-averse service providers and equipment suppliers.

The Shift To Enterprise Networking

It´s for these reasons that there is resurgence in enterprise networking. The industry model where most IT services are delivered by a wide range of service providers culminated with bankruptcies and layoffs. As a result, there is a flood of professionals heading back to corporate IT jobs. According to the clients we´ve been working with, this transition has been most acute during the last two quarters. Many of the professionals that were let go